Level the Playing Field - by Deregulating

Lawmakers and regulators have been struggling in the last few years to adapt to the rise of the so-called “sharing economy,” a relatively new and increasingly popular peer-to-peer economic model. Familiar experiences such as catching a ride, paying to sleep in a bedroom, making some money doing odd-jobs, and cooking a meal in exchange for money are all made easier by sharing economy companies such as Lyft, Airbnb, TaskRabbit, and Feastly. Yet despite the fact that many sharing economy services are demonstrably popular they have encountered opposition across the world from market incumbents as well as regulators, who see the sharing economy as a dangerous and arrogant menace rather than a welcome competitive disruption.

Opponents of the sharing economy often argue that sharing economy companies enjoy an unfair lack of regulatory constraints that puts consumers at risk. Supporters argue that while there are a number of safety issues related to the sharing economy it is unclear that they must be dealt with by new legislation or regulation. Sharing economy companies have major financial incentives to protect providers and consumers and have demonstrated that they are capable of implementing safety improvements and features in the absence of regulation. In my view, policy relating to the sharing economy must be as hands-off as possible, not least because attempts to regulate companies such as Lyft and Airbnb in ways analogous to taxis and hotels could limit innovation and be used to engage in regulatory capture. Rather than pursue legislation that seeks to regulate sharing economy companies like their traditional competitors, lawmakers ought to deregulate these competitors in order to make the regulatory playing field as level as possible while allowing for innovative disruptors to enter markets.

 

Solving an Information Problem

Everyone reading this essay owns something that they value very little but which might be valued very highly by someone else. While someone might consider their collection of old books, baseball cards, or CDs as a waste of space, someone else might think very differently. Yard sales illustrate this very well. Of course, rather than put household junk on the front lawn homeowners can now advertise goods on eBay, which is much better than a yard sale at allowing buyers to find information about sellers.

The sharing economy helps individuals solve similar informational problems. Most people have spare resources, skills, or time that are not used to make money because of a lack of information. Before home sharing companies such as Airbnb a full-time software engineer who owned a property with a spare bedroom would find it difficult to find a visitor looking for a room in her city. Likewise, before companies like Uber and Lyft arrived on the scene that individual would also have found it difficult to locate passengers to ferry around town in exchange for money in her spare time. Before the sharing economy the price of finding the relevant information to offer spare bedrooms or rides was oftentimes prohibitive. Thanks to the sharing economy people can more easily make money from spare assets and skills that they do not use in their full-time jobs.

Unsurprisingly, this has proven popular. Uber, one of the best known sharing economy companies, is valued at $40 billion and operates in 54 countries, while Airbnb has been valued at $13 billion and available to property overs in over 190 countries.[1] Yet despite their popularity, sharing economy companies have faced regulatory barriers.

 

Regulatory Concerns

Many of the regulatory issues related to the sharing economy are due to the fact that companies like Uber and Airbnb fit awkwardly into existing regulatory regimes.

Uber, Lyft, Sidecar, and other rideshare companies allow for private car owners who are not commercially licensed to use a smartphone app to find passengers willing to part with some money in exchange for a ride. There is no doubt that rideshare drivers are competing with taxis, but there does seem to be a clear conceptual difference between someone using their own car to provide rides (oftentimes part-time) and a full-time commercially licensed and insured taxi driver.

Likewise, people listing properties on Airbnb, HomeAway, and FlipKey are competing with hotels without themselves being licensed hotel proprietors, and homes used by Feastly and EatWith providers are not restaurants.

Before the sharing economy, the regulatory distinctions between a private car and a taxi, a spare residential bedroom and a hotel room, and a restaurant and a home dining room were much clearer. Now, sharing economy companies are blurring these distinctions. Regulators and lawmakers across the world have dealt with this conceptual blurring in different ways.

For instance, in Las Vegas officers with ski masks have impounded rideshare vehicles.[2] In contrast, both Colorado and California have passed legislation that legalizes ridesharing and provides insurance requirements. In some parts of Europe, Uber’s ridesharing service has been banned.[3] Airbnb hosts have been issued cease and desist letters as well as fines.[4]

Many of the crackdowns on sharing economy companies occur because they are not operating within the regulatory framework for taxis, hotels, and other industries competing with the sharing economy. Lawmakers and regulators dealing with the sharing economy must decide whether companies operating in this new economic model ought to be regulated like their traditional competitors. I believe that they should not. Indeed, lawmakers and regulators ought to view the rise of the sharing economy as an opportunity to deregulate the sharing economy’s competitors.

It is understandable that companies like Lyft and Airbnb upset people working in the taxi and hotel industry. After all, Lyft and Airbnb are competing with taxis and hotels for business without having to overcome the regulatory barriers taxis and hotels face. Taxi drivers must have commercial licenses and insurance, and in many jurisdictions taxi companies must have medallions in order to operate. These medallions artificially limit the number of taxi drivers and as a result are very expensive. In addition, many jurisdictions restrict not only how many taxis are permitted in a given area but also how far a taxi can travel and how much a ride can cost. Hotel owners must pay occupancy taxes and adhere to regulations relating to disabled access, fire escapes, and so on. Home sharing hosts are not required to comply with these same regulations, although Airbnb is voluntarily collecting local tourism taxes in San Francisco, Portland, San Jose, Chicago, and Washington D.C. Airbnb also recommends that hosts have smoke and carbon monoxide detectors in their homes.[5]

While some regulators are tempted to regulate sharing economy companies like their competitors, to do so would be a mistake that betrays a misunderstanding of how the sharing economy works. It would also threaten to stifle innovation. It might seem that because Uber competes with taxis and Airbnb competes with hotels that Uber and Airbnb should be regulated like taxis and hotels. This reasoning is misguided.

Fundamentally, sharing economy companies are, unlike their traditional competitors, providing information via their technology to individual providers and consumers. Airbnb, Uber, and Feastly do not own their users’ homes, cars, or food. Rather, they own a technology or platform that allows drivers to find passengers, homeowners to find temporary guests, and cooks to find mouths to feed. To fit the sharing economy companies into a regulatory regime that includes regulation that predates smartphones and assumes a very different sort of business model would be inappropriate.

Yet, it is the case that rideshare companies like Uber and Lyft have praised the passage of legislation that allows them to operate legally. Lawmakers and regulators in both Colorado and California have legalized ridesharing, but while it might be tempting to welcome such changes, it is worth remembering that these new regulations could hamper innovation and encourage regulatory capture.

For instance, Californian and Coloradan regulations recognize ridesharing companies like Uber and Lyft as so-called “Transportation Network Companies (TNCs).” The regulations in place for TNCs do allow Uber and Lyft to operate in California and Colorado. But the new TNC designation only adds to the number of regulations governing transportation in California and Colorado and could be abused by established companies such as Uber in order to limit competition.

New regulatory designations for the sharing economy not only offer sharing economy companies the opportunity to influence policymakers and engage in regulatory capture. They are also limiting. At the moment Uber is focused solely on transportation, so the TNC designation seems initially appropriate. However, if in the coming decades Uber expands into the logistics industry, competing not only with taxis but also with companies like FedEx and UPS, the TNC designation will be unhelpful as well as inappropriate.

It is conceivable that companies like Airbnb and Feastly could also be subjected to a regulatory regime that introduces new carve-outs rather than implementing deregulation. Given the regulatory grey area discussed above, this is especially worrying for sharing economy providers using their residential property to make some extra money. We ought to be very wary of potential carve-outs that classify someone’s house as anything other than a private residential property.

Adding to the already extensive pages of regulations faced by businesses in the U.S. amid the rise of the sharing economy may seem like an appropriate response now, but in the long term such moves could end up being abused and potentially used to infringe on property rights. Deregulation will not only allow sharing economy companies to develop and innovate, it will also allow for their traditional market incumbents to do the same.

 

Safety Concerns

Many of the criticisms leveled against the sharing economy take the form of safety concerns. There have been reports of Uber drivers assaulting passengers as well as Airbnb guests damaging property. Critics argue that rideshare companies and home share companies put customers at risk when they flout the regulations that govern taxis and hotels.

Yet in the case of ridesharing, companies already have stricter background check requirements than most taxi companies and include two-way rating systems that encourage good behavior on the part of the passenger as well as the driver.[6] Likewise, Airbnb guests and hosts are rated. Badly behaved providers and consumers in the sharing economy do not last long, and the lack of anonymity means that anyone who does commit a crime is unlikely to escape justice.

Perhaps one of the sharing economy’s most interesting potential benefits is the emphasis that sharing economy companies put on reputations and good behavior. Uber and Lyft drivers face being dropped if they do not maintain high ratings, and Airbnb bans hosts who do not conform to Airbnb’s ethos and culture or who behave badly. EatWith, which also allows for ratings and reviews, is very strict when considering hosts and boasts that only 4 percent of applicants who apply are accepted.[7] As the sharing economy grows we shouldn’t be surprised if something like a “reputation score” becomes a metric considered along with credit scores. There are already websites such as TrustCloud which rate sharing economy users based on participants’ trustworthiness. Unsurprisingly, sharing economy companies are working on providing safety and good service in the absence of burdensome regulation. Without regulation it is still in the best interests of sharing economy companies that their providers and consumers are not harmed and enjoy their experiences.

 

Conclusion

Lawmakers who wish to introduce new regulations often cite public safety and market failure. A case cannot be made that the sharing economy is awash with market failure. Nor can a case be made that the sharing economy poses a greater risk to consumers than market incumbents. Indeed, innovations such as two-way rating systems and verified accounts remove provider and consumer anonymity from the sharing economy, ensuring that sharing economy participants have a major incentive to behave well.

Sharing economy companies have highlighted the over burdensome nature of many of the regulations that govern transportation, accommodation, and other industries. It is understandable that people working in these industries are frustrated by sharing economy competitors who have not paid the same regulatory costs that they have. However, regulators should resist the urge to impose old regulations on new innovative companies or to write new regulations that could encourage cronyism and stifle growth. Sharing economy competitors deserve the chance to compete, and regulators can help them do this by deregulating the industries the sharing economy is disrupting. The forces of a free  market, not regulatory bodies, should decide which providers survive and which ones fail.

 

Notes